Financial Analysis Decision Making

FACS rogue 1 If you require a receipt for the post module grow please shade the form on a let looseer floor and clip it to the outside sc becrow of your assignment, together with a stamped pre-addressed envelope. * To be completed by the student * * * * holler MODULE CHUTSANA NA NAGARA FINANCIAL ANALYSIS &038 check out SYSTEMS MODULE watch 3rd, 4th, 7th December 2007 DUE DATE FOR POST MODULE incline January 28, 2008 I confirm the post-module engagement relating to the above module was received on Signature . Warwick Manufacturing class N. B. Post Module Work received by WMG later on 16. 0 (Monday- Friday) pull up stakes be stamped as having arrived on the con vergeinous running(a) day. Chutsana Na Nagara (0654258) FACS rascal 2 I decl ar that the work contained in this assignment is my own, unless(prenominal) oppositewise stated. Signed Chutsana Na Nagara (for on-line submission it is except necessary to type your name in this space) MODULE human activity MODUL E DATE GROUP NAME FINANCIAL ANALYSIS &038 CONTROL SYSTEMS 3rd, 4th, 7th December 2007 B CHUTSANA NA NAGARA (0654258) Chutsana Na Nagara (0654258) FACS pageboy 3 TABLE OF CONTENTS rapsc solelyion movement 1 analysis of the pecuniary Reports Electrocomp geniusnts plc. Brief Description of Electrocomponents Plc. 4 valuation of Company Performance .. 7 Group Income arguing and profitableness symmetrys . 7 Group proportionateness tag. 9 Efficiency Ratios.. 10 fluidity Ratios 3 Investment Ratios. 14 Group gold feed in contention .. 16 Conclusion . 16 Corporate Governance .. 17 Ethical Concerns .. 8 Suggestions 18 Question 2 anxiety account Part A Cash Management. 21 Part B (1) Budgeting .. 23 Part B (2) marginal appealing. 24 extension 6 altogetherudeences. 34 Chutsana Na Nagara (0654258) FACS foliate 4 FINANCIAL ANALYSIS AND CONTROL SYSTEMS Question 1 compend of the fiscal Reports Brief description of the attach to Electrocomponents Public Company circums cribed is a lofty service distri b arlyor of electronic, electromechanical and wider industrial w ars. They translate mathematical products to world-wide engineering customers. The radical operates in 27 countries, transiting 82% of global GDP, and supplies to approximately of the remaining countries worldwide via third party distri simplyors.Chutsana Na Nagara (0654258) FACS summon 5 Group Strategya triad grade-plan commencing from whitethorn 2005 ? Focus separately on dickens distinct customer groups, electronic and Electromechanical (EEM) and Maintenance and Repair and Ope proportionalityns (MRO) by extending products ranges and availability to gird on the enthusiastic response and get through customer expectations. ? ? Implement the incorporated system, Enterprise Business System (EBS) Create a lower represent infrastructure moving to refreshful head offices, tighter defy of personifys, supplying strand heed, for instances Main Products Nearly 350,000 produc ts around the world.The main product ranges atomic number 18 ? ? ? ? Electrical, mechanisation and cables Electronic components, power and connectors Mechanical products and tools IT, test and safety equipment Main guest Groups replete(p) around 1. 5 million customers from all industrial sectors be typically research and development (R&038D) or maintenance engineers in caper. They likewise sell products to end customers. rate of flowly they argon focusing on 2 main customer groups allude to product groups. 1. Electronic and Electromechanical or EEM Primary customers are electronics design and pre and low script electronics merchandise.This has been seen as an cute and exploitation segment beca riding habit of strong electronics mart harvest-tide, technology proliferation and R&038D investment. Chutsana Na Nagara (0654258) FACS rapscallion 6 2. Maintenance, Repair and Operations or MRO at bottom MRO, their classical customer is admitd in factory automation that pr incipally utilisations process tick and automation products (PCA). Main Markets are shared into 4 geographical areas UK, continental Europe, jointure the States and Asia Pacific. below. UK 40% Current market size (in gross revenue) is shown Continental Europe 33% Asia Pacific 9% northeastern America 18% Chutsana Na Nagara (0654258)FACS Page 7 Channels ? history a traditional channel ? e-Commerce total around 25% of groups sales ? cope counters/ gross sales Offices run globally Evaluation of Company Performance.. Four proficiencys are selected (horizontal analysis, style analysis, vertical analysis, and ratio analysis) to interpret and illustrate transmission line work during category 2007 comparing to 2006 and 2005. For trend analysis, Y2005 is assumed to be a base year (= cytosine%) as it was the last year onwards massive investments and reorganization projects took place as well as implementation of upholding dividend give/share.Ratios volition be divided into f our groups to try company work in separate areas. Group Income Statement and Profitability Ratios.. (Calculations in auxiliary1-2) Trend analysis shows sales rich person change magnitude by 13% from Y2005 as international sales emergenced (Business Review) repayable to a combination of strong revenue growth in continental Europe, compass north America (joint promotions programs), and Asia Pacific peculiarly a booming customer acquisition program and contri furtherion from new Thailand sales office.However, salute of sales has change magnitude by greater mensuration (by 20%). by and large speaking, embody of sales should not addition some(prenominal) to a greater extent than add in sales because this shows that all scramd goods might not be change (stolen, defected, etc. ) or stabbing Chutsana Na Nagara (0654258) FACS Page 8 stuff and nonsense appeal greatly rose referable to inefficient procurement. Also, prescriptly when sales accessions, stemma will rec eive discounts from big batch purchases and even slims constitute of sales. By comparing cost of sales with sales Y2005 was accounted for 47% but Y2006-7 was the same at 49% of sales.So the problem for Electrocomponents might be, ( header Executives and Business Review), that their strategy to expand product ranges, availability, and promotions to fall in satisfy and attracts customers in eminently competitive markets. These led to amplification in ocellus-taking place and cost of sales. As a result, gross proceeds change magnitude by only 4% from Y2006 or 8% from Y2005 (lesser amount than sales growth). right off affected. primitive network and mark-up ratios are gross Profit Ratio perfect(a) Profit x one C Sales Y2007 443. 5 x ascorbic irate = 50. 5 % 877. 5 Y2006 426. 4 x atomic number 6 = 51. 5 % 828. 5 Gross realise ratio shows each ? sales communication channel acquire 50. 5pence and cost of sales took 49. 5p from it because of increase in cost of sales a s mentioned earlier. To illustrate, sales increased by 5. 9% (877. 5 -828. 5? m) but cost of sales increased by 7. 9% (434 402. 1? m). Mark-up Ratio Gross Profit x c Cost of Sales Y2007 443. 5 x vitamin C = 102. 2 % 434 Y2006 426. 4 x snow = 106% 402. 1 Mark-up ratio shows the profit subscriber line added up to cost of sales has fall. Gross profit derived from sales deducted by cost of sales. They normally change adversely the more(prenominal) cost of sales, the less gross profit.Ratio withal illustrates market occurrence UK is their biggest but amplyest competitive market (Business Review) so increasing price to foster profit is prohibited. That is why tune earned only 2. 2pence profit later(prenominal) deducting all cost of sales. Chutsana Na Nagara (0654258) FACS Page 9 For internal comparison, Gross profit ratio is compared with net margin ratio lolly borderline Ratio Operating Profit x blow Sales Y2007 91. 1 x coulomb = 10. 4 % 877. 5 Y2006 68. 5 x one hundre d = 8. 3 % 828. 5 They are measuring profitability at divers(prenominal) levels. Although gross profit ratio abated, net margin ratio increased.This supports that strain better managed operating expenses through achieving in Enterprise Business Systems or EBS and reorganization projects. In other words, It is notwithstandingified that (13%increase) distribution and lot expenses which seems to be variant cost (especially sales commissions) for Y2007 has changed in relation to sales (14%increase)comparing to Y2006 these expenses increased 15% part sales only increased 7%. This was because strong field sales team in conjugation America, EBS, and Japans e-commerce increased to 57% of its sales, (Business Review).Moreover, administrative expenses ( indomitable costs) greatly declined (78%) because reorganization project led to low infrastructure cost especially the removal of around 110 roles including the clo rate of flow of the tele merchandise department in the UK (Webpage1 ). So, total operating expenses decreased to 40% as a component of sales and led to increase in operating profit by 32% from Y2006. Regarding profitability, the business is doing well in borderinals of generating net income from worldwide sales growth which is supported by effective marketing activities, product strategies, and investment projects.Group Balance woodworking plane. (Also refer to attachment3-4) Overall picture, Y2007 total summations were some the same as Y2005, despite a slight increase in Y2006s. On the other side ( summations = liabilities + beauteousness), while fixed liabilities and equity decreased, afoot(predicate) liabilities was the Chutsana Na Nagara (0654258) FACS Page 10 only one area that greatly increased especially loans and borrows that increased by ? m56 and also with increases in distribute and other payables by ? m9. 4. For further analysis, we shall look at detailed performance from ratios.Efficiency ratios Inventory employee straino ver Ratio (times) Cost of Sales (Ending) Inventory Y2007 434 160. 6 Y2007 434 159. 6 = 2. 7 = 2. 7 402. 1 158. 6 Y2006 402. 1 150. 45 Y2006 = 2. 5 Cost of Sales (Average) Inventory = 2. 7 Inventory disorder ratio If average inventory is utilize to calculate ratio, business system efficiency of purchasing and selling goods at the same level of 2. 7times. A high gear relative volume of 2. 7times whileover means business had only 4 months of sales in stock.However, it is acceptable to use ending inventory as it was the most new inventory level business held and it shows that supply chain management truly helped improve stock turn from 2. 5 to 2. 7times (Business Review). Notes17 illustrates that business tended to increase raw materials while decrease unblemished goods. In general, when sales increase, business should stock finished goods for availability to customersnot raw materials as they are not immediately ready for sale. However, ratio lav mislead if business stocks too much and cost of sales are not well-managed, the ratio still increases and problems are hidden.Debtor Collection Period ( geezerhood) Receivables x 365 (Average) Trade Debtors Y2007 150. 5 x 365 = 62. 6 877. 5 Y2006 138. 2 x 365 = 60. 9 828. 5 Debtor entreaty period Gross trade debtors (from Notes18) comparing to sales shows business has begun to weaken than Y2006 and industry figure because normal period for UK is around only 50 days, Dyson1 Chutsana Na Nagara (0654258) FACS Page 11 (2007). Also, if comparing it with inventory turnover ratio, company sold products quicker but collected groovy slower. The possible reason might be menses global expansions, for example, new trades in Thailand.Payment transactions are neither to date well-settled nor flo move ong smoothly therefore, increase leadtime. Also, it is possible that customers buy more because engaging character references terms are offered especially high competitive and mount market like UK (Notes2 and Business re view). This is meaningless because salesnot bills inflow increases. Moreover, business must ensure the collection period is shorter than credit sales otherwise business rat go bankruptcy. Net Assets Turnover (times) Sales Capital Employed Y2007 877. 5 450. 4 = 1. 9 828. 5 543. 5 Y2006 = 1. 5Net asset turnover shows the improvements in efficient utilization of majuscule assiduous to baffle sales. E rattling ? 1invested in assets, business earned or so ? 2sales. Sales increased (as earlier mentioned) while uppercase employed greatly decreased mainly because of increase in current liabilities especially unbarred bank facilities and loans, Notes20. Fixed Assets Turnover Ratio (times) Sales Fixed Assets NBV (NBV = Net Book Value) Y2007 877. 5 95. 3 = 9. 2 828. 5 96. 3 Y2006 = 8. 6 Fixed asset turnover ratio Business had better employ fixed assets to suffer sales or they began to pay off.In other words, e really(prenominal) ? 1fixed assets invested fag end generate sales ? 9. 2. Main effects were from decrease in net book honour of intangible assets (Notes12) and slightly increase in property, plant and equipment (Notes13). However, sales increased in greater amount hence, comfortable ratio. It is wise to compare net book value with other businesses (on like-for-like basis) or industrial ratio for comparisons of performance and position. Chutsana Na Nagara (0654258) FACS Page 12 Similarly, fixed assets gage be compared with operating profit to show its ability to generate profitnot just sales.Operating Profit Fixed Assets NBV Y2007 91. 1 95. 3 = 1. 0 times 68. 5 96. 3 Y2006 = 0. 7 times superpower to generate profit has also improved therefore, business well utilised fixed assets to generate both sales and profit. In similar fashion, we gutter see how well business utilized total assets as below. way out on nitty-gritty Assets Operating Profit x coulomb add together Assets Y2007 91. 1 x hundred = 13. 5 % 676. 8 Y2006 68. 5 x ampere-second = 9 . 7 % 703. 3 call in on total asset ratio shows that company has improved on utilizing each ? 1total assets invested to generate profit.Ratio is higher(prenominal) due to decrease in intangible assets (Notes12), immediate payment and interchange equivalents (Notes28), while increase in operating profit. Regarding efficiency in using assets, business is also doing well in this area accept for debtor collection period that has slightly gone up two more days and is still much farseeinger than the average UKs, Dyson1 (2007). This suggests business closely hold international sales and payments along with its expansions. Chutsana Na Nagara (0654258) FACS Page 13 Liquidity ratios. (Also refer to Appendix3-4)Current Ratio Inventory + Debtors + Cash + minuscule term investments Creditors + Short term loans + Overdrafts Y2007 350. 7 211. 9 = 1. 7 360. 3 146. 5 Y2006 = 2. 5 This measures how well business burnnister immediately pay debt from sufficient mobile resources when it falls d ue. It shows their ability to use any ? 1current assets to pay current debts was weaker because creditors and enormous current borrowings/loans increased (Notes19-20) while decreased in hard currency and gold equivalents especially call deposits and investments (Notes28). We further look at acid test.Acid analyse Debtors + Cash + Short term investments Creditors + Short term loans + Overdrafts Y2007 190. 1 211. 9 = 0. 9 201. 7 146. 5 Y2006 = 1. 4 Normally, inventory dopenot immediately turn to cash. Acid test which excludes inventory shows real business ability to meet its obligations. Acid test declines to even lower than 1 showing a worrying sign. Business invested in too much inventory such(prenominal) as product ranges which affected their liquid. Although, some liabilities may not be due in some months, business cannot neglect the situation.Their liquidity seems truly stretch at the moment as the two ratios shows a pattern sign that business did not maintain proper lev el of liquidity and can expose to more severe financial risk unless they shambling curtlyest improvement. Chutsana Na Nagara (0654258) FACS Page 14 Investment ratios (Also refer to Appendix3-4) adapt Ratio (Fixed loans and borrowings + Current loans and borrowings Cash and cash equivalents) x ascorbic acid impartiality Y2007 (76. 3 + 79 -19. 1) x atomic number 6 304. 6 = 44. 7 % Y2006 (137. 2 + 23 39. 4) x one hundred 336. 4 = 35. 9 % Interest hold out (times)Operating Profit Interest Charges Y2007 91. 1 5. 9 = 15. 4 68. 5 3. 4 Y2006 = 20. 1 Operating Profit (%Change Y2006-7) (91. 1 68. 5) x one hundred 68. 5 = 33 % Interest Charges (%Change Y2006-7) (5. 9 3. 4) x nose candy 3. 4 = 74 % Gearing ratio increased from Y2006 This illustrates business depends more on borrowed cash rather than shareholder funds. It seems that business borrowed short term loans for (main consumption) development of new warehouse and office in North America (Business Review, Notes2). At the s ame time, shareholder funds decreased due to decrease in other reserves, Notes26 hence higher ratio.Regarding shareholders view, they may be in high financial risk as borrowing resides must be nonrecreational onwards distributing dividend and, in liquidation lenders will be repaid before shareholders receive any repayments, FACS1. The gearing ratio itself does not mean very much because it depends on type of business and investment stage. We compare it with lodge in cover Chutsana Na Nagara (0654258) FACS Page 15 which decreased due to interest charges increased by greater amount (74%) than profit (33%). It shows that operating profit can only cover interest charges 15. times so once again this is because interests paid for current borrowings/loans as mentioned earlier. Dividends = 18. 4p per share for three years Refer to Chairman Statement the Board announced in Y2005 that business would maintain dividend paid at 18. 4p per share for the following three years. This is good fo r shareholders as they dwell exactly what they will receive, however, it is very risky for business as they must ensure to earn sufficient profit to meet what they express or, if not, business must seek new documentation sources to finance such commitment. Return on Shareholder FundProfit after Tax &038 Interest x vitamin C Shareholders Funds Y2007 56. 2 x c = 18. 5 % 304. 6 Y2006 43. 6 x century = 13 % 336. 4 Return on shareholder funds increased because of increase in profit after evaluate and interest which is mainly due to no provisions for Y2007 RoHS cost (Notes3, 11), profit on sale of former head office (Notes5, 11), and decrease in other reserves in shareholder funds (Notes26). This gives authorization to shareholders that every ? 1invested can generate profit 5. 5% higher than Y2006. Chutsana Na Nagara (0654258) FACS Page 16 Group Cash Flow StatementThe record illustrates profits earned each year is totally divergent from cash they hold. It serves as a tool for man agement restrain that throw ins business varan their cash flows especially the cash evasions. The first major cash outflow was capital expenditure and financial investment which might be due to infrastructure projects business is implementing especially new warehouse in North America, (Notes2, Business Review). Moreover, Income Statement for year ended 2005-7 shows profits after impose and interests attributable to equity shareholders (? m67. 6, 43. , and 56. 2 for Y2005-7 respectively) are less than total dividends paid of ? m80 (18. 4p/share). This is probably the reason that business had new bank loans during these three sequentially years (Cash Flow Statement). Although loans might also be distributed to other activities, it seems that they were partially paid as dividends as announcement in Y2005. Consequently, this is why Y2007 profit (? m85. 2) which increased from Y2006 (? m65. 1), was actually left at the end of the trading year as real cash and cash equivalents at on ly ? m17. 2 decreased from ? m38.Conclusion In conclusion, since the business has been established in 1928, they are growing and expanding internationally rapidly (Webpage2 and Webpage3). At present, they are doing well in term of profitability, efficiency, and investment areas, or to say, they are succeeding in sustaining global sales growth across the group, grow margin stabilization and tight control of costs. ROCE ratio also illustrates overall success. Chutsana Na Nagara (0654258) FACS Page 17 Return on Capital Employed (ROCE) Operating Profit x deoxycytidine monophosphate Capital Employed Y2007 91. 1 x ampere-second = 20. 2 % 450. Y2006 68. 5 x nose candy = 12. 6 % 543. 5 ROCE is the combination of Net leeway and Net Assets Turnover. As earlier mentioned both ratios increase and led to importantly increased ROCE. It suggests that overall performance is satisfied due to effective determine and cost management as well as asset management were improved comparing to Y2006. Thi s also illustrates overall success in EBS, product strategy, new technology launches, supplier relationships and low costs projects that are paid off. The number of times (1. 9) that net assets can generate sales is very important as one turn equals to 10. % that sales can generate profit. That is why ROCE = 20. 2% as it equals two turns. This suggests that it may greatly increases sales very soon because business recently plans to accelerate sales growth in China which is a big potential market and if business can manage to utilize assets well, there will be increase in profit on capital employed even more. Furthermore, it is better if the ROCE rate of 20. 2% is less than the rate of cost (interest rate) that business pays for money borrowed to invest in these assets because it means assets are used for generating profit that can cover cost of acquiring them.Regarding Corporate Governance (Webpage4), the business is pillow slip to the provisions of the Combined Code on Corporate Governance produce in July 2003 and appended to the Listing Rules of the UK Listing Authority. There are some practices company must follow. For example, the Audit Committee shall consist of not less than three members and be independent non-executive directors. Also, it is authorized by the Board and able to examine any activity inwardly its Terms of Reference which allows for full admittance to Company information and can seek that information from any employee of the business.Employees are directed to co-operate with any request made by the Committee. If, at all time, company strictly follows the set rules, they can ensure operating properly. Chutsana Na Nagara (0654258) FACS Page 18 Moreover, regarding Ethical bring ups (Business Review), they are focusing on more areas of responsibilities such as ethical trading and sets of KPI for environmental concerns. Along with their profitability, business is considered be on track of long term prosperous. However, there is one im portant area that needs to be immediately improved. This is liquidity. From the logic below hit assets = Fixed Liabilities + Current Liabilities + 676. 8 100% = = 145. 8 21. 54% + + 226. 4 33. 45% + + Equity 304. 6 ? m 45. 01% or Sources of asset investments are from three parts. Business acquires funds from borrowings/loans 54. 99% (21. 54% + 33. 45%) which exceeds equity (45. 01%). The proportion shows business is considered at high risk. This exhibit is also strongly supported by earlier ratios and cash flow analysis. Suggestions.. Suggestions figure to point out at major areas. Most of them involve the concern on liquidity which has been mentioned earlier. . Recently, there are galore(postnominal) business activities vent on to support their expansions that involve mostly in long term investments. However, it seems that business finance their activities with short term liabilities as they increased significantly, Notes20. This is not a proper means of investment because, n ormally, short term liabilities are at higher interest rate and the payment due is rather (amounts falling due less than a year is as high as 79? m from 23? m, Notes20), but business uses them for long term investments which take time to generate cash back.Business may soon suffer from low liquidity and inability to pay day-to-day expenses and interests as business pays back the cost of using money even before they make profit from the money borrowed. Chutsana Na Nagara (0654258) FACS Page 19 The evidence was supported by increased in Gearing ratio while, Current ratio, Acid test and Interest Cover ratio yield significantly decreased. Although, interest expenses from borrowings mow tax payable, business must ensure they take away ability to pay interests and it is worth to do so.Unless they restructure funding sources, they can go bankruptcy very soon because many long term projects will be implement next year. By doing so, business sure enough improves their liquidity and redu ces financial risk for business itself as well as shareholders. 2. It was very risky that the Board has announced to maintain the same amount of dividend paid for three years while business is under investments/expansions and these two activities consume huge amount of money. Dividend amount is greater than profits after tax and interests business seemed to borrow current liabilities for cash dividend paid.This could be a good strategic idea to retain shareholders confidence on the victorious implementation of EBS, execution of the strategy and cost reduction initiatives will significantly improve financial performance over the next three years. However, it could turn to be the worst idea especially when liquidity is now in concern. The alternative solutions can be that business issues more shares so they use cash received to pay dividend or pay shareholders with stock dividends (dividend reinvestment plan) so they still retain cash in the business.These two alternatives will incre ase number of shares so, refer to Gearing ratio, financial risks can be reduced. occlusion 1&0382 above suggest that business rearrange sources of funding by seeking for long term sources and bewares of overtrading. They are expanding, stocking more inventories, having more debtors but lack of cash to pay for creditorsnot only from normal trading but also interests from borrowing/loans. Although the Board seems to be sure that after all these investments come alive under well-managed plan for implementations they will urely benefit and guarantee long term prosperous to business, business may go bankruptcy even before reaching the goal. Chutsana Na Nagara (0654258) FACS Page 20 3. Businesss strategy to satisfy customers with around 350,000 products stocked globally, this can hardly do so efficiently. Although inventory turnover seems satisfied, acid test shows inventory greatly affects businesss liquidity. Business is suggested see inventory policy to rearrange classes and only st ock fast moving, high volume but low value items.For slow moving, low volume but high value items, business may decide to use pooled strategy by stocking them in one warehouse in stance that can easily transport products to anywhere needed, Chopra and Sodhi (2004). 4. Business is expanding very much. Their performance on receivables collection period is slightly weaker because trading worldwide interfaces with many parties and increases procedures complexity. Business must ensure activities are in control and they have sufficient cash to pay creditors. 5. Regarding risks assessment (Business Review) it is wise to include isks from suppliers into condition as they are trading in competitive markets with enormous competitors and high penalties. Satisfying customers is vitally important therefore, this requires reliable suppliers as well as effective supply chain management for inventory management and reduce cost of sales. 6. It is suggested business focus on international markets e specially North America and Asia which have higher revenue growth. Currently, North Americans e-commerce is account for only 10% of total sales. This is elatively low comparing to other regions. This may be a great opportunity to increase profits because sales can be increased through e-commerce while, costs are reduced from, for example, reduction in sales teams. (3,824 Words) Chutsana Na Nagara (0654258) FACS Page 21 Question 2 Part A Cash Management. The signification of cash management in managing a business. Cash is one of the most important resources in running a business as Pizzey (1998) rove that it is the life-blood of the business.However, cash is not profit. Highly profitable businesses cease to exist just simply because they do not maintain sufficient cash to allow proper level of liquidity for example, paying for routine business expenses. term too much idle cash means inefficiency as it does not generate any added value to business. To avoid falling into either en ds, business needs cash management. This can be done through preparing cash flow statement to examine past performance and include disciplinary actions/improvements in cash budget for future directions/guidelines.To illustrate, business can discover transaction flows with initial factors identify risk because it allows for regular monitoring and control plan their money ahead such as acquiring funds from proper sources at reasonable price rather than rushing into lenders when problems amazingly happen, etc. We can therefore, say that ultimate significances of cash management are that business runs smoothly, stably is safe from insolvency and increases confidences for shareholders. Impact of Production Managers role on the cash position of the business game.Refer to Year2 Cash Flow Statement (Appendix5) Major decisions that affected (negative) cash position were Machine filling &038 bottle neck Machine Mark-I has longest leadtime. Work-in-process are slowly produced. absolute g oods tie up waiting for workin-process before consolidating into batch delivery. The seven-day leadtime, the longer business gets paid from customers and it is even longer from foreign markets. So it keeps borrowing more money to run business and paying interests. Chutsana Na Nagara (0654258) FACS Page 22Routing At fist stage, Wolfs were produced from Mark-I which had most expensive unit cost of $m(5). This increased cost of sales and while price was fixed, business received less profit. Capacity Business has already invested in Engineering&038Quality and bought new factory. However, using Mark-I led to poor capacity decreased opportunity to win big contracts and limited sales volume. Business ended up with light products to generates enough sales to cover all costs especially capital expenditure. Three issues above affected cash out-flows which led to extremely high negative cash position.One possible solution is to replace Mark-I with Mark-III to efficiently increase capacity . So leadtime is decreased stocks are reduced business tends to decrease debtors, increase profit, reduce loans and interest paid hence, cash position gets better. Comment on the impact of Production Managers role in managing the cash in a real business. Managing real business will involve more complex issuesunlike the game. The role affects managing cash in metrical composition of ways Control on scrap/defect rates to reduce cost of sales. Methods to manage defected products to minimise all costs related. Sequencing rule when thousands different product groups are produced/day, good sequencing is required to avoid delay, quality problems and unneeded costs. The more costs increase, the less profit business gainsespecially in competitive markets where prices can hardly be increased, business suffer more severely. It is worth remembering some points decisions cannot be made in isolation as ones decisions affect others. All flows commitment is vitally important. Also, final dec isions must be considered regarding companys For example, purchasing function cuts cost by enefits not a functions. ordering low quality materials. Additional costs pass on to inspection and production functions. Also, if customers reject products, there will be claiming Chutsana Na Nagara (0654258) FACS Page 23 process, reverse logistic, and product replacement. All these increase costs for whole business no matter in which functions they occur. (541 Words) Part B (1) Budgeting Budgeting Budgeting comprises of two important parts, preparation and budgetary control, which will be described referring to FACS2.Preparation Business critically analyses internal and external environments/factors to formulate strategic plans that must be in line with business objectives. Business then sets up operational plans with properly identifying resource requirements to support strategies. This resource plans are finally translated into financial plans to complete a budget preparation. Budgetary c ontrol Budget is compared with actual figures. If variances occur, incidentally corrective actions are required involving sending feedbacks back for reviews and formulated plans and/or forecasts may be revised. These re continuous processes and required management voices/commitments at all time so that intended benefits are surely achieved. The technique can apply to WinningMarginTM. Our objective is to lead Wolf markets and strategy is ensuring products are adequate for sales. We prepare production and sales budgets (Appendix6-7) showing maximum productions are 14 Terriers and 8 Wolfs with total sales $116. 6. From this point, purchasing manager knows how many exactly materials to order and when to prevent material shortage. Production manager can effectively manage shift allocations.Financial manager can see how much money to borrow more as we plan to invest in engineering and quality next year. Moreover, commercial manager can evaluate market share correctly. All Chutsana Na Na gara (0654258) FACS Page 24 functions know their responsibilities and control areas which help achieve the objective. In real business, all processes are much more complex and involve enormous factors such as competitors, substitute products, technologies, government legislations, as well as funding/borrowings which are not easy or fast as in the game. Also, business is legally committed to pay tax and interests which can be very high.More importantly, suppliers and customers are not always reliable. Late payments from customers or late delivers from suppliers can severely interrupt whole business plan/process. (298 Words) Part B (2) Marginal Costing Marginal Costing Marginal costing is a costing technique that helps business make decisions. We must understand cost behaviors to properly classify and, more importantly, control them. Total costs roughly comprised of variable costs, which changes with activity Dyson3 (2007) and fixed or time-based costs, which remain unchanged within a period of time regardless of how many products produced.The difference surrounded by price and variable cost can be used to cover fixed costs and this is known as parcel. Business makes profit from any share amount exceeds fixed costs or loss, if insufficient contribution. Regarding WinningMarginTM, this technique would have helped our decision in choosing market. Appendix8 suggests we produce Tiger because of highest contribution in both situations. However, we actually chose Wolf. To make profit from Wolfs we must produce 11 Wolfs (best case) or 76 Wolfs (worst case). However, our capacity is very limited due to machine constrains (Appendix6).This suggests we have adequate investments in engineering Chutsana Na Nagara (0654258) FACS Page 25 quality and market development to get best purchasable prices as well as enough contracts so that all products will be sold. Alternatively, we may replace MarkI with Mark-III to increase capacity hence, increase contribution and profit. In real business, marginal costing is more widely used for strategic decisions, for example Make or buy Normally making products in-house required more fixed costs. Business buy-in if increase in variable costs is less than fixed costs. Price incentives Reducing price can increase sales.Business reduce price if contribution from additional sales can cover total price reduction. Or increase price if contribution covers total sales lost. Comparing to real world, a number of costs are associated. To get best from the technique, business ensures they carefully distribute all costs to the right groups otherwise results can mislead decision-making and greatly affects business. (296 Words) Chutsana Na Nagara (0654258) FACS Page 26 Appendix Appendix 1 Trend epitome of Group Income Statement 2007 (? m) SALES tax income 877. 5 877. 5 x 100 773. 9 2006 (? m) 828. 5 2005 (? m) 773. 9 113% 828. 5 x 100 773. 9 = 107% 100% (Cost of sales) 434 434 x 100 361. 8 402. 1 = one hundred twenty% 402. 1 x 100 361. 8 361. 8 = 111% 100% uncouth take in 443. 5 426. 4 = 103. 5% 412. 1 443. 5 x 100 412. 1 = 108% 426. 4 x 100 412. 1 100% (Distribution &038 marketing expenses) 346. 2 346. 2 x 100 303. 3 348. 9 = 114% 348. 9 x 100 303. 3 303. 3 = 115% 100% (Administrative expenses) 6. 2 6. 2 x 100 8 9 = 78% 9 x 100 8 8 = 113% 100% (Total operating expenses) 352. 4 357. 9 311. 3 OPERATING PROFIT 91. 1 91. 1 x 100 100. 8 68. 5 = 90% 68. 5 x 100 100. 8 100. 8 = 68% 100% Chutsana Na Nagara (0654258) FACS Page 27Appendix 2 Vertical compendium of Group Income Statement 2007 (? m) SALES REVENUE 877. 5 = 100% 828. 5 2006 (? m) = 100% 773. 9 2005 (? m) = 100% (Cost of sales) 434 434 x 100 877. 5 402. 1 = 49% 402. 1 x 100 828. 5 361. 8 = 49% 361. 8 x 100 773. 9 = 47% GROSS PROFIT 443. 5 426. 4 412. 1 (Distribution &038 marketing expenses) 346. 2 348. 9 303. 3 346. 2 x 100 877. 5 = 39% 348. 9 x 100 828. 5 = 42% 303. 3 x 100 773. 9 = 39% (Administrative expenses) 6. 2 6. 2 x 100 877. 5 9 = 0. 7% 9 x 100 828. 5 8 = 1% 8 x 100 773. 9 = 1% (Total operating expenses) 352. 4 352. 4 x 100 877. 5 357. 9 = 40% 357. x 100 828. 5 311. 3 = 43% 311. 3 x 100 773. 9 = 40% OPERATING PROFIT 91. 1 68. 5 100. 8 Chutsana Na Nagara (0654258) FACS Page 28 Appendix 3 Trend Analysis of Group Balance Sheet 2007 (? m) frozen(p) ASSETS Intangible Assets 2006 (? m) 2005 (? m) 196. 7 196. 7 x 100 191. 9 208. 2 = 102. 5% 208. 2 x 100 191. 9 191. 9 = 108. 5% 100% Property, plant, and equipment 111. 1 111. 1 x 100 110. 9 112. 8 = 100% 112. 8 x 100 110. 9 110. 9 = 102% 100% Investments Other receivables Deferred tax assets Total fixed assets 0. 3 2. 7 14. 2 325 325 x 100 323. 2 0. 3 3. 2 17. 5 342 = ci% 342 x 100 323. 2 0. 2 2. 17. 4 323. 2 100% = 106% present-day(prenominal) ASSETS Inventories 160. 6 160. 6 x 100 142. 3 158. 6 = 113% 158. 6 x 100 142. 3 142. 3 = 111. 5% 100% Trade and other receivables 171 171 x 100 145. 1 162. 3 = 118% 162. 3 x 100 145. 1 145. 1 = 112% 100% Income tax receivable Ca sh &038 cash equivalents 1. 1 19. 1 19. 1 x 100 64. 8 1 39. 4 = 29. 5% 39. 4 x 100 64. 8 2. 2 64. 8 = 61% 100% Total current assets 351. 8 351. 8 x 100 354. 4 361. 3 = 99% 361. 3 x 100 354. 4 354. 4 = 102% 100% Total assets 676. 8 676. 8 x 100 677. 6 703. 3 = 100% 703. 3 x 100 677. 6 677. 6 = 104% 100% Chutsana Na Nagara (0654258) FACS Page 29Appendix 3 Trend Analysis of Group Balance Sheet (Continued) 2007 (? m) CURRENT LIABILITIES Trade and other payables 2006 (? m) 2005 (? m) 132. 9 132. 9 x 100 109. 5 123. 5 = 121% 123. 5 x 100 109. 5 109. 5 = 113% 100% Loans and borrowings 79 79 x 100 27. 7 23 = 285% 23 x 100 27. 7 = 83% 27. 7 100% Tax liabilities Total current liabilities 14. 5 226. 4 226. 4 x 100 155. 9 13. 3 159. 8 = 145% 159. 8 x 100 155. 9 18. 7 155. 9 = 103% 100% Net current assets 125. 4 125. 4 x 100 198. 5 201. 5 = 63% 201. 5 x 100 198. 5 = 102% 198. 5 100% 521. 7 100% Capital employed 450. 4 450. 4 x 100 521. 7 543. 5 = 86% 43. 5 x 100 521. 7 = 104% FIXED LIABILITIES Other payables Retirement benefits obligations Loans and borrowings 7. 9 38. 7 7. 8 41. 8 7. 6 47 76. 3 76. 3 x 100 92. 5 137. 2 = 82% 137. 2 x 100 92. 5 = 148% 92. 5 100% Deferred tax liabilities Total fixed liabilities 22. 9 145. 8 145. 8 x 100 166 20. 3 207. 1 = 88% 207. 1 x 100 166 18. 9 166 100% = 125% EQUITY Called-up share capital Share exchange premium account Other reserves Total equity 43. 5 38. 7 222. 4 304. 6 43. 5 38. 4 254. 5 336. 4 43. 5 38. 4 273. 8 355. 7 Chutsana Na Nagara (0654258) FACS Page 30 Appendix 4 Vertical Analysis of Group Balance Sheet 007 (? m) FIXED ASSETS Intangible Assets 2006 (? m) 2005 (? m) 196. 7 196. 7 x 100 325 208. 2 = 60. 5% 208. 2 x 100 342 191. 9 = 60. 9% Property, plant, and equipment 111. 1 111. 1 x 100 325 112. 8 = 34% 112. 8 x 100 342 110. 9 = 33% Investments Other receivables Deferred tax assets Total fixed assets 0. 3 2. 7 14. 2 325 = 100% 0. 3 3. 2 17. 5 342 = 100% 0. 2 2. 8 17. 4 323. 2 CURRENT ASSETS Inventories 160. 6 160. 6 x 10 0 351. 8 158. 6 = 45. 7% 158. 6 x 100 361. 3 142. 3 = 44% Trade and other receivables 171 171 x 100 351. 8 162. 3 = 48. 6% 162. 3 x 100 361. 3 145. 1 = 45%Income tax receivables Cash &038 cash equivalents 1. 1 1 2. 2 19. 1 19. 1 x 100 351. 8 39. 4 = 5. 4% 39. 4 x 100 361. 3 64. 8 = 11% Total current assets 351. 8 = 100% 361. 3 = 100% 354. 4 Total assets 676. 8 703. 3 677. 6 Chutsana Na Nagara (0654258) FACS Page 31 Appendix 4 Vertical Analysis of Group Balance Sheet (Continued) 2007 (? m) CURRENT LIABILITIES Trade and other payables 2006 (? m) 2005 (? m) 132. 9 132. 9 x 100 226. 4 123. 5 = 59% 123. 5 x 100 159. 8 109. 5 = 77. 3% 109. 5 x 100 155. 9 = 70% Loans and borrowings 79 79 x 100 226. 4 23 = 35% 23 x 100 159. 8 27. 7 = 14. 4% 27. 7 x 100 155. 9 = 18%Tax liabilities Total current liabilities Net current assets Capital employed FIXED LIABILITIES Other payables Retirement benefits obligations Loans and borrowings 14. 5 226. 4 = 100% 13. 3 159. 8 = 100% 18. 7 155. 9 = 100% 125. 4 450. 4 201. 5 543. 5 198. 5 521. 7 7. 9 38. 7 7. 8 41. 8 7. 6 47 76. 3 76. 3 x 100 145. 8 137. 2 = 52% 137. 2 x 100 207. 1 92. 5 = 66% 92. 5 x 100 166 = 56% Deferred tax liabilities Total fixed liabilities EQUITY Called-up share capital Share premium account Other reserves Total equity 22. 9 145. 8 = 100% 20. 3 207. 1 = 100% 18. 9 166 = 100% 43. 5 38. 7 222. 4 304. 6 43. 5 38. 4 254. 5 336. 4 43. 5 38. 273. 8 355. 7 Chutsana Na Nagara (0654258) FACS Page 32 Appendix 5 Year 2 Cash Flow Statement of air Game (Reconciling profit to cash) Year 2 Cash Flow Statement Profit before interest Add Depreciation Movements in working capital (Increase)/Derease in stock (Increase)/Derease in debtors Increase/(Derease) in debtors funding costs and taxation Interest paid Dividends paid Tax paid Investing activities Capital expenditure Disposal of assets Cash generated/(consumed) in year Financing activities Loans raised/(repaid) Other Increase/(Decrease) in cash in year $m (14) 6 (8) (13) (24) 0 (45) (10) 0 0 (55) (34) 0 (89) 0 0 (19) Appendix 6 Production Budget factory 1 Machine Mark-I Mark-I Mark-I Mark-II Mark-III Mark-III Mark-III Mark-III Q1 Te Te Te Te Wo Te Wo Te Te Te Wo Te Wo Total (22) Q2 Te Q3 Q4 Total units Terrier Wolf 1 1 2 2 4 4 4 4 14 8 Tiger 2 Te Wo Te Wo Te Wo Te Wo 3 Chutsana Na Nagara (0654258) FACS Page 33 Appendix 7 Sales Budget Terrier Opening finished stock (Q1) Production (from Production Budget) Available for sales Forecast unsold finished stock (Q4) Sales Direct costs $s Sales value $s 0 14 14 0 14 14&2152 = 28 14&2154. = 63 Units Wolf 0 8 8 0 8 8&2154 = 32 8&2156. 7 = 53. 6 Tiger Total 60 116. 6 Appendix 8 Optimizing Contribution Terrier take up Worst 5 3 2 2 3 1 13 38 Wolf Best Worst 7. 5 5. 5 4 5 3. 5 0. 5 11 76 Tiger Best Worst 10. 5 8. 5 6 7 4. 5 1. 5 9 26 Sales value Variable cost Unit contribution Break-even volume (Fixed cost of ? 38) Chutsana Na Nagara (0654258) FACS Page 34 References Business Review Electrocomponents plcs ye arbook report and accounts 2007, p. 8-13 Chairman Statement Electrocomponents plcs annual report and accounts 2007, p. Chief Executives Review Electrocomponents plcs annual report and accounts 2007, p. 7 Chopra and Sodhi (2004) Managing risk to avoid supply-chain breakdown, MIT Sloan Management Review, Fall 2004, p. 53-61 Dyson1 J R (2007) Profitability Ratios, Accounting for Non-Accounting Students, Pearson Education Limited, England, 7th Edition, p. 230 Dyson2 J R (2007) Profitability Ratios, Accounting for Non-Accounting Students, Pearson Education Limited, England, 7th Edition, p. 230Dyson3 (2007) Direct costs, Accounting for Non-Accounting Students, Pearson Education Limited, England, 7th Edition, p. 293 FACS1 Financial Analysis and control systems module pack, WMG, Winning MarginTM, p. 14 (2007) FACS2 Financial Analysis and control systems module pack, WMG, Budget and Budgetary Control, 2007 FACS3 Financial Analysis and control systems module pack, WMG, Marginal Costin g, 2007 Group Balance Sheet Electrocomponents plcs annual report and accounts 2007, p. 25 Chutsana Na Nagara (0654258) FACS Page 35Group Cash Flow Statement Electrocomponents plcs annual report and accounts 2007, p. 26 Group Income Statement Electrocomponents plcs annual report and accounts 2007, p. 24 Notes 1 30 Please refer to Notes to the Group Accounts, Electrocomponents plcs annual report and accounts 2007, p. 29-45 Pizzey A (1998) Cash the life-blood of the business, finance and Accounting for Non-Specialist Students, Financial Times, Pitman Publishing, England, p. 83 Webpage1 About Us, Low Cost Infrastructure, Electrocomponents plc webpage, online, http//www. lectrocomponents. com/ecm/about/strategy/infrastructure/ Webpage2 About Us, Our History, Electrocomponents plc webpage, online, http//www. electrocomponents. com/ecm/about/history/ Webpage3 Investor Center, Historic Trends, Electrocomponents plc webpage, online, http//www. electrocomponents. com/ecm/ir/finperfor mance/trends Webpage4 Our Responsibilities, Corporate Governance, Electrocomponents plc webpage, online, http//www. electrocomponents. com/ecm/responsibilities/corpgov/ Chutsana Na Nagara (0654258)